Gold Price Makes Gains On Dovish Minutes But Can The Rally Last?

New York (Aug 20) The gold market continues to hold on to most of its gains after Wednesday’s minutes of the July Federal Open Market Committee (FOMC) but the outlook among commodity analysts is mixed to whether or not prices can continue to push higher.

Thursday morning, buying momentum in the gold market pushed prices to their highest level since July 17. As of 9:23 a.m., Comex December gold futures last traded at $1,144.20 an ounce, up $16.30 on the day.

According to many economists the minutes from the July Fed meeting had a dovish tone as committee members noted conditions to support a rate hike haven’t been met yet but that they were “approaching that point.”

Some Fed members raised concerns about China’s slowing economy and that could pose a risk to U.S. growth. Some members also raised concerns that diverging U.S. monetary policy with the rest of the world could lead to further gains in the U.S. dollar, pressuring commodity prices lower and hurt the nation’s exports.

Commodity analysts at Commerzbank noted as a result of the minutes the Fed Funds Futures are pricing in a 30% chance that the Fed raises rates in September. They note that if gold prices can hold gains above $1,142 an ounce, it might encourage some more follow through buying.

Market strategists at iiTrader said in a note Thursday morning that gold prices have to at stay at least above $1,138.70 an ounce, which represents the market’s 50-day moving average, to maintain the current momentum.

“A failure and close back below 1130.4-1135.3 will leave the bears with an edge, sending the tape lower,” they said.

A key factor for the gold market will be the U.S. dollar, which has been losing ground since the release of the minutes. Currency analysts at BNP Paribas, who have been bullish on the U.S. dollar, said there are risk that the U.S. dollar continues to lose momentum against the euro and yen as the minutes “torpedoed” any chance of a September rate hike.

“Overall, we think the minutes validate the lack of a bullish catalyst for the dollar against the G10 core,” they wrote. “We remain short EURUSD via longer-term options structures but acknowledge that the EUR may continue getting some near-term support in an environment of weak risk sentiment.”

However, not all analysts are optimist that gold can hold its gains.

Some analysts note that despite the dovish minutes, a September rate hike is still not off the table. Analysts at ABN Amro said in a note Thursday morning that they expect to see gold remain under pressure as the Fed remains on track to raise interest rates next month.

“We expect “some” further improvement ahead as the gains in the job market continue to support the economy. This is what the Fed wants to see before a rate hike,” they said. “With financial markets now attaching a lower probability to a Fed rate hike in September, the market impact will be more substantial if the Fed decides to hike that month. Then, financial markets will adjust upwards their interest rate hiking expectations for this year and next year. This will spur the US dollar and result in lower gold and other precious metal prices.”

Edward Meir, commodity consultant for INTL FCStone, also said in a note that he is expecting the Fed to hike rates in September.

“For one thing, the minutes are reflecting late July deliberations and US macro numbers have continued to come in on the stronger side since then. Although the sharp slowdown in Chinese growth, coupled with weakness evident in both the local stock market and currency are important variables for the Fed to consider, the central bank typically is very US-centric and seldom defers a rate decision based on overseas developments,” he wrote.

He added that there is still a risk that gold prices fall lower in the near-term. “Despite gold’s impressive run and improving chart patterns, we are some-what neutral on the complex here, as we think the precious metal could be vulnerable heading into the September Fed meeting…,” he said. “As noted in earlier commentary, we think that gold should come under increasing pressure as we near the Fed meeting, but could rally after the event is over, especially if investors sense that the Fed may be done after one or two moves.”